BATS Chief on Friday’s Troubles: ‘My Stomach Sank’

After months of planning and anticipation, BATS Global Markets would finally go public. Among the unique distinctions of the I.P.O. was that the company’s stock would be listed on its own exchange, a point of pride but also one that would require a lot of work.

It was a problem that BATS executives thought they had solved — until they were proved wrong at about 10:45 a.m., when technical issues led the company to shelve its offering and darkened what should have been the exchange’s biggest achievement to date.

Now Mr. Ratterman, the exchange’s chief executive, must grapple with concerns both outside and inside the company. Some critics have used the failed offering to criticize both high-frequency trading and the fracturing of the market into numerous trading platforms, taking aim at the core of what BATS represents. And David Cummings, BATS Global’s founder and a board member, wrote a widely distributed e-mail on Sunday that called for withholding bonuses for the company’s executives.

“It’s been a tough Friday, and it’s been a tough weekend,” Mr. Ratterman told DealBook in an interview by phone on Sunday. “We feel absolutely terrible about letting our customers down.”

While BATS successfully oversaw the listing of several exchange-traded funds earlier this year, hosting a corporate listing entails different challenges.

Priding itself on being available for trades more than 99.9 percent of the time, BATS employees spent months performing daily tests involving a wide array of industry participants. By Thursday night, when BATS priced its stock at $16 a share, company executives thought they were prepared.

Friday began like any other day, with the ringing of a bell on the floor of the company’s headquarters in Lenexa, Kan., to begin trading. BATS executives then gathered around a desk on the floor, watching the order book for the I.P.O. being filled.

But within seconds, staffers noticed that a computer problem had arisen. A “matching program” used for stocks with symbols between A and BFZZZ had locked up, preventing orders from being fulfilled and leading to a nosedive in the stock price within seconds.

BATS had to issue a “self-help” notice, calling upon the aid of rival exchanges. Amid the chaos, three erroneous trades for shares in Apple , including one that was well below the iPad maker’s current price, slipped through, leading to an automatic halt in Apple’s stock.

“My stomach sank,” Mr. Ratterman recalled. “It was tough. This was supposed to work smoothly.”

Within two hours, BATS executives said they believed they had solved the problem and considered reopening trading in their own stock, which would start at what they believed was an accurate first quote of $15.25. But by that point, the company’s mishaps had been broadcast far and wide, with a potentially disastrous sell-off in the shares possible. After consultation with the company’s underwriters, BATS executives decided to postpone the I.P.O. indefinitely.

“It was undetermined how well that would go,” Mr. Ratterman said of the potential reopening of trading. “The activity could have been chaotic.”

The move has led to some grumbling among investors who expected to buy BATS stock, with one money manager calling the incident “a real black eye.” And the company’s trading volume that day fell several percentage points below its normal 11 percent, as customers rerouted trades to other platforms.

Mr. Ratterman said he viewed that drop in business to be temporary, though he offered no balm for irritated investors who had agreed to buy shares in the I.P.O. He reiterated Mr. Cummings’s statement that no company executives would receive bonuses tied to the completion of the offering.

In his e-mail, Mr. Cummings called for completing the offering next quarter. A company spokesman said in a statement that BATS had no immediate plans to restart the I.P.O. process.

One thing that the failure of the I.P.O. did not change, according to Mr. Ratterman, was the continued path that modern stock markets have followed in the last decade. BATS was founded on the principles that more trading platforms and increased computerization would be better for investors over all, and the problems on Friday was not expected to change the growth of either. Mr. Ratterman argued that BATS Global’s problems were confined to its own exchange and its own ticker, adding that the problematic Apple trades were quickly unwound.

“Our system failed,” he said. “I don’t believe that had a material impact on anyone else.”
Here is a message from Mr. Ratterman that BATS e-mailed to customers and the press on Sunday evening:

Dear BATS Customers and Members of the Trading Community,

It is with great humility that I write to you for the first time in quite some while. As you are probably aware, we have been working towards a planned IPO for many months, and as a result of the quiet period restrictions I did not reach out as often as I would have liked recently.

Let me get right to the point … BATS experienced a serious technical failure Friday morning and I want to apologize for not measuring up to the level of excellence that you have come to expect from us.

You undoubtedly have heard that we experienced a system problem in our attempt to open the BATS ticker symbol for the first time on Friday morning. We failed to roll into continuous trading with our new BATS ticker immediately following the opening auction. In effect, our newly issued stock did not begin trading as it should and was halted before it ever started trading.

Technology implementations are prone to failures and unexpected outcomes, even after going through rigorous testing. Every market center and every trading participant has experienced technical issues in their history. Our historical reliability has been very strong, with 99.9% uptime on our primary BATS BZX Exchange over the last 3+years. On Friday we were under the brightest spotlight imaginable … opening our own stock on our own exchange for the first time ever. It doesn’t get much more public than that.

Our listing Exchange has an obligation to operate and maintain fair and orderly markets. In the ordinary course, when an exchange experiences a technical problem, normal trading in the effected securities resumes once the technical problem is resolved. This situation was unique, however, because the effected security was our own. After fixing the software module that failed, and rolling it back into production, we were faced with how the market would react to a re-opening of our stock after the failed first start. Had the delay been only a few minutes, the start process would have possibly been manageable. But after 2 ½ hours had transpired, we determined that this was a material event that had eroded investor confidence and made the timely resumption of fair and orderly trading unlikely. As a result, we pulled the IPO and unwound all auction executions.

We take pride in our technology, and Friday’s failure to perform as expected has no excuses. In addition to several months of our own internal testing, we thoroughly tested this new auction functionality with trading participants for many weeks prior to Friday. It shouldn’t have failed, but it did, and the timing couldn’t have been worse.

To those who have supported us through the last 6+ years as we have brought competition, efficiency, and innovation into the markets we operate, please accept my sincere apology and our commitment as a company to do much better. I also extend regrets to the many institutions we met with over the past couple of weeks on the IPO roadshow. We owe it to all of you to do better and we will work even harder to earn your trust and confidence in the months and years ahead. Despite the setback we suffered last week, we intend to build on our long track record of success and keep moving forward.

Sincerely,

Joe Ratterman
Chief Executive Officer
BATS Global Markets, Inc.

And here is the e-mail message from Mr. Cummings, which he emphasized represented only his thoughts and not those of the BATS board:

Dear Trading Community,

In light of BATS botched IPO, several people are asking: What should BATS do now?

Understand this is Serious

First, I recommend suspending all bonus plans at BATS. In this business, mistakes cost money.

Fix the Bug

Ironically, the software bug itself is probably the easiest thing to correct. The fix should take less than a week. Given the importance, they need to test and retest the code for a couple weeks.

This was a freak one-time event. BATS has built great software over the past 6 or 7 years. The BATS matching engine has literally matched BILLIONS of orders without problems. However, the code to open an IPO is new. It has been tested in the lab, but until this week not in real-world production. These systems are very complicated. Bugs do occur. BATS just happened to discover a bug at the most embarrassing time possible.

Develop a Credible IPO Plan

BATS management should develop a plan to go public in the second quarter, if possible. This might seem tough, but I believe it is the only way to move past the issue.

Sure, the deal needs to be re-priced. Mistakes cost money. As embarrassing as the event was, it does not have much long-term impact on earnings. BATS has solid fundamentals.

Defend Electronic Trading

Before I got into trading, I worked at a healthcare software company, Cerner, ticker CERN. I called my broker for a quote, “24.00 bid 24.50 ask, what do you want to do?” I hung up. NYSE’s website claimed they “filled the average market order in only 23 seconds!”

Over the past decade, electronic trading has brought huge savings to investors. The old middlemen lost their fat spreads, and some are now the most vocal critics of HFT. Some in the media love to overhype the occasional glitches. They envy people who make money. American Capitalism is sometimes messy, but it is what makes this country great.

When the public wants to invest, they can push a button and get a fair fill in less than a second. The markets will never be perfect, but the reality is that they work very well.

The views above are my own and do not represent the views of BATS or its management. I am an investor in BATS and sit on its board, but do not participate in its day-to-day management. This summer, I will have been back at Tradebot for 5 years. The “quiet period” for IPOs is a stupid rule.